Greasing the risk levers

A surge in oil prices on supply disruption worries lifted energy and material shares in world markets overnight. S&P 500 and the Dow ended higher on Tuesday, with the former just 21 points shy of the record-closing high of 2130.82.

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2015-11-04T08:54:40+0000

Source: Bloomberg

Despite a lacklustre corporate earnings so far, the S&P 500 managed to erase heavy losses incurred in the late August stock rout, by having a really sharp recovery in October, surging 8.3%, the best monthly gain since October 2011. 78% of S&P 500 firms have reported quarterly earnings so far, which showed both sales and earnings growth on the decline from a year ago.

Indeed, there may be concerns around the resilience of the current recovery. Although dovish expectations for the Federal Reserve, alongside rising hopes of more European Central Bank easing, may have shore up bullish sentiments, technical indicators suggest that there is risk of a short-term pullback or the onset of a near-term consolidation period.

Relative Strength Index (RSI) indicator is showing signs that the S&P 500 is approaching overbought territory. Market breadth has also showed that the percentage of members trading at more than their 50-day moving average is beyond 80%. In the past, a period of pullback or sideways trade usually ensues after the 80% mark is breached.

In addition, the mild gains in European and US equities during the overnight session signalled to market participants to be wary of being caught near the top of the recent rally in global equities. Nonetheless, the positive vibe was extended to the Asian session. Investors mostly bought into Asian indices.

Interestingly, the publication of PBOC governor Zhou Xiaochuan’s comments on the Chinese central bank’s website sparked a surge in Chinese equities. Mr Xiaochuan said that the Shenzhen-Hong Kong stock connect would start in 2015, in comments taken from a speech five months ago in May. Despite the dated remarks, Chinese indices soared in excess of 4%.

The Shenzhen Composite, which is widely expected to benefit the most from the trading link, climbed over 5%, led by a +6.4% jump in the ChiNext index. The CSI 300 did pretty well too, rising 4.7%.

However, it is important to consider the fact that Mr Zhou’s comments were made when the Hong Kong’s exchange said that regulatory approval was still being sought for the trading link. Furthermore, it was before the Chinese equity markets went into a tailspin in middle of June, where $5 trillion was wiped out.

It might be unlikely that the Shenzhen-Hong Kong stock connect may be up and running before the end of the year, given that it is already November, and Chinese authorities would be more interested in ensuring that domestic markets remain stable for a while longer before rolling out the platform.

Tellingly, there have been few details about the timing of the plan since June. This means that there may be some profit-booking in the coming sessions. It is also worthwhile to note that the SHCOMP is once again approaching the psychological 3500 level.

Regionally, Asian stocks are generally higher. The Hang Seng index also benefited from the PBOC news, rallying over 2%, and past 23,000. The Straits Times Index moved above 3000, supported by buoyant Chinese shares and positive sentiment.

The Nikkei added 1.3%, as the world’s largest IPO this year, Japan Post and its two financial units, bolstered investors’ interest in Japan. Shares of the Japan Post Holdings leaped 26%.

According to Bloomberg, SGX CEO Loh Boon Chye said that the local bourse operator plans to diversify its revenue streams further from equity and derivative businesses. He added that SGX aims to launch a bond-trading platform in the coming months which would allow companies to sell debt in smaller amounts. There are also plans to introduce currency products.

In the currency markets, dollar continued to gain favour in Asia, as the Dollar iIndex marched higher, up around 0.2% as of 3.50pm (SGT). This put pressure on euro and yen, with investors looking to get back into the policy divergence trade. Traders appeared to be expecting a higher probability that the Fed will move on rates in December, with the Fed Funds Futures market pricing in a 50% likelihood, up from 34% a week ago, and before the FOMC meeting.

A trio of Fed officials will be speaking today, including chair Janet Yellen and vice chair Stanley Fischer. They are likely to reiterate the points mentioned in the FOMC policy statement last week. This would harden the view that the Fed is very keen to kick-start the rate normalisation before the end of the year.

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